A LOT has been done, but, once again, with the absence of key reforms. It means that hard work awaits the new assembly in the Banski Dvori, which houses the Croatian government. These words could be used in describing the balance of the economic politics of Andrej Plenkovic's government after almost a four-year mandate.
Key steps were made, but that's not even remotely enough
According to analysts, during that period, Croatia made substantial progress in many areas: the tax reform was implemented in several phases, the national treasury's balance sheet was put in order, public debt was reduced, the unemployment rate dropped, and the living standard began to improve. During Plenkovic's mandate, Croatia has strongly integrated into the EU and made its first steps towards the introduction of the euro as well as entering the Schengen Area, all of which wasn't even remotely enough. Or, at least, wasn't good enough with respect to the expectations of business owners, economists, and citizens.
Bujas: We've expected more
"I would be lying if I said that nothing was done. The business climate has improved, income tax was reduced, and the small part of parafiscal charges was canceled. A stable macroeconomic frame was preserved. However, in the almost four-year mandate, we've expected more," said Hrvoje Bujas from Glas Poduzetnika (the Voice of the Entrepreneur) association for Index.
Hrvoje Bujas
As for Plenkovic's government's oversights, Bujas points to keeping a large number of parafiscal charges, which makes doing business much more difficult, and not extending the VAT reduced rates of 13 percent on the overall tourism and catering industry. He also points out that the abolition of reinvested income taxation didn't occur, which led to narrowing the investment potential of companies. Bujas said that he'd expected significantly braver moves on the government's part in reducing income tax. At the same time, he was, as the majority of other business owners, disappointed with introducing minimal contributions payment for managers of small businesses, which, he pointed out, needs to be abolished.
"We've expected especially braver moves in the functioning of the justice system, which is equally inefficient today as it was four years ago, and that represents a grave problem for businesses. The administration proliferated, and the number of towns and municipalities wasn't reduced. In fact, there were no crucial reforms. That's why we'll continue to lag behind other EU countries," Bujas points out.
A step forward in macroeconomic planning, a step back on the microeconomic level
According to economists, significant improvements had been made in macroeconomic planning, especially when it comes to the balance sheet in state finances. Still, on the microeconomic level, little had been done. The consequences are that, during the preceding period, Croatia only strengthened its infamous economic status, which relies on tourism and rent, which comes back like a boomerang after the onset of the coronavirus crisis, an impact from which it will take years to recover.
"The rental income in tourism implies nice weather and pure luck, not technology and innovation. But in the coronavirus conditions, the rent is now drained," said Zeljko Lovrincevic from the Zagreb Institute of Economics for Index.
Zeljko Lovrincevic
He also said that the Croatian macroeconomic planning had improved, which was also confirmed by indicators, but not much has changed on the microlevel in Croatia. Technologically, the Croatian economy hasn't progressed much; it wasn't until the coronavirus pandemic that digitalization was stimulated, while the institutional issues haven't significantly changed. The result is that some EU members that were behind us before, such as Romania, have now reached the same level as us, and even overtaken us in some segments, leaving Croatia bottom-ranked in the EU, accompanied by Bulgaria, which is also progressing faster than us.
Romania and Bulgaria have progressed faster than Croatia
Besides, the Eurostat data speaks for itself: in the period from 2016 to 2018, which is the latest available data, we've moved up only for a few steps in comparison to the EU average.
Namely, in 2016 we were on the 61 percent of the EU development average, which amounted to 63 percent in 2018. At the same time, Romania has jumped from 60 percent to 66 percent.
"Croatia has also experienced an improvement in the standard of living, but others have been running much faster than us," Lovrincevic evaluated.
Of course, it doesn't mean that Croatia hasn't benefited from almost seven years of the EU membership. For example, merchandise export in the EU increased. Opening of the labor market of other EU members has become a sort of an exhaust valve for unemployed Croats, who have rushed to work in Germany, Ireland, and other more developed EU member states, which resulted in significantly reduced employment rate in Croatia itself. Usage of the money from the EU funds have increased, and the government has also come close to achieving two of its crucial goals - Eurozone and the Schengen Area entry.
Another side of the EU membership: We haven't even entered the Schengen Area or the Eurozone
But, the Croatian EU story has another side. We haven't joined the Schengen Area yet, and we don't know when and how that borderless area is going to look like. We also don't know the new government's attitude towards the introduction of the euro, which could additionally slow down our way to the Eurozone.
It should be pointed out here that outside factors played a significant role in the good results in macroeconomic planning, i.e., an upswing in economy in the EU and the world in the previous years, which also "pulled" the Croatian merchandise export. The tourism market activity also worked in our favor, so it can be freely said that Croatia has built its success mostly on tourism in the last couple of years.
On the other hand, there have been no crucial reforms. Barely anyone mentioned the public administration reform and territorial restructuring before the coronavirus crisis arose, while the privatization has died.
The other countries pulled us
"We've had economic growth because the others did too. Some progress had been made, but Croatia still has weak potential for economic growth," said Vedrana Pribicevic from the Zagreb School of Economics and Management for Index.
Vedrana Pribicevic
Our interlocutor would give a "C" to Plenkovic's government. Other economists have similar assessments. According to Pribicevic, the government made progress in macroeconomic planning, but it often didn't know to present its accomplishments to the public, and there's much it failed to do, despite the favorable outside circumstances for the reform processes. In the meantime, others were progressing faster than us.
"We've been riding the same race with bicycles, while others have been driving cars. Croatia simply has an engine too weak for that race," Pribicevic explains.
The weak engine of the Croatian economy
The consequence of driving such a weak engine is the reduced competitiveness of the Croatian economy. Also, the number of new workplace openings by the Croatian economy is down to a minimum.
Pribicevic also points out that certain ministers, such as the Finance Minister Zdravko Maric, had achieved good results in their departments. But she also warned that there had been no coordination among the economy ministries during the mandate of Plenkovic's government. On the other hand, Lovrincevic noticed that Plenkovic's government had been functioning in conditions of the thinner majority in the parliament, along with constant alternating, reshuffling, and racketeering.
Agrokor, Uljanik, Ina...
Inventory of the work of Plenkovic's government cannot be closed without the problems it encountered with some of the leading Croatian companies. The first half of the Plenkovic cabinet's mandate was undoubtedly marked by Agrokor and the "Hotmail" affair, exposed by Index. There's also the Uljanik problem, as well as the announcement of repurchasing Mol shares in Ina, which still hasn't been carried out.
By and large, one could say that Plenkovic's government has made certain progress, but not even remotely enough for some future races that await Croatia. In the last year of Plenkovic's mandate, Croatia has been affected by the coronavirus crisis, just like the rest of the world, the consequences of which we're yet to see, and we'll be recovering from it for a long time. However, that's the job that awaits the new government.